The Investing Myths You Should Stop Believing
By Jennifer Leighton
When Michael Lewis, author of “Moneyball” and “The Blind Side,” said in a 2014 interview on 60 Minutes that the stock market was “rigged,” a nervous wave rippled throughout investors across the country. Jim Cramer, host of CNBC’s Mad Money, is often credited as a contributing factor in the 2015 run-up on the “FANG” stocks (Facebook, Amazon, Netflix, and Google), thanks mostly to inventing the clever acronym and repeating it on his show as often as possible. The parade of former celebrities and self-appointed gurus who tout everything from investing all of your money into gold to buying their sure-fire program to beat the markets obviously sell enough of their products to keep their commercials and late-night infomercials running. And who among us doesn’t have friends or family members who view every dinner party or holiday gathering as an opportunity to boast about their 16% returns or to warn the rest of the group they should put their money under the mattress because they believe a crash is looming.
When it comes to investment advice, there are as many opinions as there are ticker symbols, thereby making it difficult to distinguish fact from fiction. And the falsehoods have a way of sticking with us, don’t they? Financial urban legends, if you will… So in the interest of quieting all of the voices clamoring for attention and ratings and separating the noise from the nuggets of wisdom, here are a few of the investing myths that we – as investors and potential investors – need to quit believing.
Myth: Investing in the stock market is the same as gambling.
Reality: It’s not. In gambling, the loser gives money to the winner and nothing of value is created in the exchange. The cards are not worth more because the blackjack table is crowded; the roulette wheel does not spin faster because a throng of tourists are putting it all on red. When you buy shares of a company’s stock, you are actually buying ownership of that company. Yes, you may be “betting” on an increase in the company’s productivity and value, but you also have the potential to share in that increase. If casinos started giving out partial ownerships to every player, there may be an argument to be made. However, the most any of us “non-whales” will receive in exchange for our bets is a few comps. I don’t know about you, but I’ll take owning a piece of a company over a hotel room with a parking lot view and a couple of buffet tickets any day.
Myth: If you have $1 million saved you will be able to retire comfortably.
Reality: Not necessarily. There is no one-size-fits-all amount when it comes to how much you need to save for retirement and a myriad of factors – including longevity, cost of living, health issues, and lifestyle expectations – all come into play. Determining your magic retirement number isn’t as simple as creating the goal of reaching the million dollar mark. Instead, work with a financial advisor to figure out what your individual needs in retirement will be. You’re unique and your financial plan should be as well.
Myth: Investing in bonds is safer than investing in stocks.
Reality: Define “safe.” For some investors, “safety” may be found in bonds – which typically provide lower short-term returns in exchange for less volatility. For others, long-term “safety” comes with a more aggressive portfolio that will grow over time and the “risk” of investing in stocks is a calculated one. Much like your retirement number, the allocation of your portfolio should be personal and address the specifics of your financial situation.
Myth: You should save for your kids’ college before you save for retirement.
Reality: Wrong! There are many options for paying for college – grants, scholarships, work-study programs, and loans, for example. However you can’t borrow for your retirement and, as far as I know, there are no grants to help you move to Florida. If you have to decide between contributing to a college savings plan or contributing to your 401(k), pick the latter. Good parents want to help pay for college, but they also don’t want to be a burden to their children in their later years.
Myth: All financial advisors are the same.
Reality: Nope. Even though the Department of Labor issued new rules requiring all financial advisors who handle 401(k)s and IRAs to “act in the best interest of their clients,” there will still be many differences between advisors. First off, this fiduciary duty will not apply to taxable accounts and preexisting investments may be grandfathered under the old standard of “suitability.” In addition, some financial advisors are paid a commission when they make trades in your account while others are not. Management fees can vary from firm to firm and from advisor to advisor. And let’s not forget to take personality, investment philosophy, and credentials into consideration. Be sure to interview potential advisors in order to find one who is the right fit.